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Key Topics
a) Why did banks tighten financing and lending requirements following the crisis? How the company got affected by it?
b) Explain briefly the way regulations within banks got tightened followed by the crisis? How would this affect the concerned company?
c) Discuss the way prevalence of high level of public debt and low-interest rate can be taken care of using fiscal policy tools. Were the tools used effectively by the Danish government?
d) A brief discussion on scope of improvisation of productivity level
b) Explain briefly the way regulations within banks got tightened followed by the crisis? How would this affect the concerned company?
c) Discuss the way prevalence of high level of public debt and low-interest rate can be taken care of using fiscal policy tools. Were the tools used effectively by the Danish government?
d) A brief discussion on scope of improvisation of productivity level
Introduction
A detailed study has been undertaken based on a topic namely Macroeconomics and Financial markets with due reference to the Denmark economy. The way measures undertaken by government of Denmark might affect NLMK DanSteel would be focussed on in the study. The measures that can be taken into consideration to stabilise the economy facing high public debt level and low rate of interest would be briefly discussed within the study taken into consideration. Ways that can adapt to NLMK DanSteel in order to improvise its level of productivity even in following the situation of utter crisis would also be analysed in detail.
Question a)
Why did banks tighten financing and lending requirements following the crisis? How the company got affected by it?
Inflation mainly reflects a situation in which purchasing value of money prevalent within the concerned economy tends to show a falling trend followed by increment in the price level. As opined by Cordes et al. (2015), anticipation of emergence of phenomenon of inflation within economy of the world might have been regarded as sole reason behind the fact that the banks existent in economy of Denmark undertaken a decision to curb supply of money within structure of the economy such that the inflationary situation can be faced in an efficient manner. Guided by this fact, the concerned Central bank of the Denmark economy might have undertaken a strategy to constrain money supply within the economy by increasing the Cash Reserve Ratio (CRR) level. In accordance to Claessens (2014), it is the CRR that provides an estimation of amount of financial resources required to be held by the banking institutions associated with it. Such increment in CRR, in a way, mainly might have contributed to tightening of various financing and lending requirements on part of banks prevalent within an economy of Denmark following the crisis.
Taking this fact into consideration, it can be stated that accumulation of more amount of financial resources with structure of such banks itself can be detrimental in case of carrying out the overall planned level of investment within the economy in a proper manner which, thereby, would tend to curtail the purchasing power level available in hands of people dwelling within the concerned economy at large (Blanchard et al. 2016). This, undoubtedly, is going to play a major role in contracting aggregate demand level of the economy and thus its GDP level. As cited by Agénor & Montiel (2015), this phenomenon would mainly be a result of the fact that a reduction in aggregate demand would discourage the producers of the economy to undertake production of goods or services as earlier which automatically would tend to affect level of employment of the economy and thereby the goods or services produced within structure of the economy in a specific financial year. This, thereby, provides an implication of the way the banks had undertaken an initiative to bring the economy back to its normal level of growth by tightening its financing and lending requirements.
The company of Denmark taken into consideration namely NLMK DanSteel is bound to get affected as a result of the adoption of such tightened measures. The company concerned is found to focus mainly on the production of good quality steel. For the sole purpose of carrying out its planned level of production, NLMK DanSteel is in dire requirement of adequate amount of financial resources (Bloomberg.com, 2017). Thereby, to get access to such resources, the company is bound to approach the banking institutions prevalent within the Denmark economy at large. However, the restrictions imposed by such banking institutions might have acted as a barrier on its part to get adequate access. In order to constrain the lending requirement, the banks might have provided acute focus on increasing its lending rate in order to discourage the excessive flow of money out of it in the form of loans. This made the concerned company suffer a lot of productivity issues which thereby affected its reputation level (Lambert et al. 2017). This might be owing to incapability on part of NLMK DanSteel to satisfy needs or requirements of customers targeted for steel.
Question b)
Explain briefly the way regulations within banks got tightened followed by the crisis? How would this affect concerned company?
Following the crisis period, it has been observed that within October 2008 to April 2015, the money base level showed an increment of about 50% in comparison to increment in money stock which was around 20%. This reflects the fact that the money multiplier has shown a dramatic declination. Money multiplier mainly represents a ratio of the level of money stock to that of its base which tends to reflect liquidity trap scenario of Denmark economy. Such reserve levels are found to be hoarded by these banks for purpose of reducing money support within the concerned economy.
The risk aversion degree of such banks, following the crisis period, is observed to be designed in such a manner that the excess amount of reserves accumulated in the form of cash are not used by them to expand their overall credit level. This led to the emergence of a situation in which the money stock level hardly showed any increment in spite of massive upliftment in the money base. Starting from 6th of February 2015, the National bank of Denmark is found to drastically reduce its level of interest rate to -0.75% from around 0.25%. However, hardly any change was observed in its discount rate, rate of lending and current account.
In order to enjoy a relatively high-level foreign-based currency inflow, the Swiss National Bank of Denmark is found to undertake the strategy to discontinue minimisation of exchange rate level while it is the European Central Bank that is found to take the initiative to launch an expanded purchase program of an asset. In words of Nyasha & Odhiambo (2018), such an initiative backed by minimal rate of exchange enabled the economy accumulate a good amount of foreign-based financial resources as a result which can be highly beneficial in case of Denmark to carry out all its productive activities in a smooth and efficient manner which, in a way, can help it enhance its growth level as a result following attainment of normalcy.
The practice of hoarding financial resources by the banks prevalent in the Denmark economy are found to be a huge barrier on part of NLMK DanSteel guided by the sole fact that financial resources required for the production of steel could not be carried out in adequate amount although the interest rate level is found to have remained unchanged. However, the company concerned is not found to get much affected as a result of such hoarding as a result of the fact that it is found to have adopted adequate technological equipments with the help of which it could produce lump sum amount of steel through the process of utilising its limited financial resources in the most effective at time of manufacturing all its steel products (Bloomberg.com, 2017).
The fact that purchasing power of people residing within the economy of Denmark is found to be at a relatively low level during the crisis period, this acted as a boon on part of NLMK DanSteel. This is largely guided by the sole fact that incapability on part of NLMK DanSteel to carry out production as per the actual needs or preferences of its targeted customers got subsided as a result of the availability of lesser amount of financial resources on part of people of the economy to demand that high amount of steel products.
Question c)
Discuss the way prevalence of high level of public debt and low-interest rate can be taken care of using fiscal policy tools. Were the tools used effectively by the Danish government?
Prevalence of high level of public debt backed by low rate of interest is not at all an overwhelming situation within the economic structure concerned. Although existence of low rate of interest might tend to encourage investment rather than more of saving activities within the economy however high level of public debt reflects a situation in which the government concerned are in a situation of high level of debt which highlights a probability of drainage or outflow of high amount of financial resources from structure of the economy (Panizza & Presbitero, 2014). Simultaneous existence of such situations can be taken good care by application various fiscal tools as per requirement by government of the concerned economy.
It can be stated that the government of the economy concerned might undertake the initiative to invest all its available financial resources in creation of job opportunities within the economy that would rejuvenate economic performance within the economy. In case of high financial debt and low interest rate, an economy fiercely needs fiscal consolidation. Low interest rate affects investment intention of people and high public debt worsen the condition. As mentioned by Blanchard et al. (2016), this deteriorating debt dynamics trigger the need of utilising fiscal policies for improving the condition. However, instead of direct taxation, debt financing is noticed to receive preference of fiscal policymakers in this relation.
Considering real GDP as a sum of per capita GDP growth and population growth, it can be deduced that the Danish economy faces a negative fiscal cost, that is interest rate is lower than real GDP (r < g+n). In such situation, fiscal consolidation aims at reducing the output level. This brings subsequent change in the money supply in medium-term. Thereby, the output level reaches its potential at a reduced interest rate.
The Danish government is found to effectively use the fiscal tool prior to facing a period of inflation. Such tool was found to be undertaken backed by the sole purpose of enabling the economy of Denmark to regain its growth level. The concerned Central bank of the economy is found to invest some amount of its available financial resources in order to develop an asset purchase program. In the near future, such investment program is found to have helped the economy to a great extent by providing good amount of financial resources to it which in a way helped it carry out all its productive activities in a better manner (Agénor & Montiel, 2015).
This increment in productivity, thereby, contributed in helping the concerned economy earn a good level of revenue by selling a great deal of products or services produced by it within a given financial year which in a way helped it accumulate an increased amount of financial resources that are found to be highly helpful in case of enabling the economy recovers its high-level public debt. Keeping the interest rate at a low level enabled the concerned economy to encourage people residing within the economy to invest the financial resources available with them in buying shares or bonds of various organisations present in Denmark. This, in a way, helped in betterment of GDP level of the economy in long-term and thereby attain normalcy in its growth level
Question d)
A brief discussion on scope of improvisation of productivity level.
NLMK DanSteel, in order to enhance its level of productivity, might undertake the initiative to generate greater level of employment opportunities within the company. To initiate this, the concerned company can arrange adequate training and development schemes that could assist the workers associated with it enhance their skill level which can be well reflected in productivity level of NLMK DanSteel. Besides this, the company associates are also required to provide immense concern on allocating the undertaken business-related activities as per the skill or knowledge of its employees.
As suggested by Chudik et al. (2017), this would help provide more motivation to the workers to work efficiently in a productive manner which in the long term can be highly reflected in productivity level of NLMK DanSteel. This is required to be backed by willingness on part of the owner of the concerned company to provide some good amount of compensation in exchange of their contribution to the specific company (Sacchi & Salotti, 2015). It is to be noted that the employees can be motivated in a better way in case the owner of the NLMK DanSteel understands the need of rewarding employees in cash or in kind for their outstanding performance at a time of involvement in various business-related activities of the concerned company.
As cited by Fernández-Villaverde et al. (2015), this would mainly be a reflection of the fact that adoption of such an incentive would tend to initiate the employees to work in a motivated manner and thereby affect productivity level of NLMK DanSteel in an advanced manner. In addition, productivity level of NLMK DanSteel can also be improvised in a better way in case HRM of the concerned company undertakes the initiative to develop good relationship terms with all its employees. This would encourage employees’ attachment to the company concerned which would encourage working in a cooperative manner.
As opined by Bodea & Higashijima (2017), good relationship terms would enable the concerned company gets access to ideas or views of the employees in case the company tends to face some problematic situation. At times, the suggestions provided by the employees might tend to be highly effective and beneficial for NLMK DanSteel to enhance its level of productivity. Besides this, the company concerned can undertake the strategy of employing fresh new candidates at fixed intervals of time.
This, in a way, might not only contribute to curtailing the unemployment of the economy but might also contribute to enhancement of productivity level of the company concern (Lambert et al. 2017). This might be a result of the fact that employing freshers would enable the company concerned get access to greater number of innovative minds which can highly contribute to its production of good quality steel that can help it develop a good reputation within the industry with which it is associated. This would include emergence of high level competition within the company structure that too can contribute to improvisation of its overall level of production of steel. In brief, scope of improvisation of productivity level of NLMK DanSteel is listed below:
- Scope of improvisation of productivity level of NLMK DanSteel
- Allocation of work as per skill
- Adoption of training and development schemes to enhance skill level
- Development of good relationship terms with existent employees
- Frequent recruitment of innovative minds
Conclusion
It can be concluded that it is appropriate application of fiscal policy tools or measures that can be highly beneficial on part of government of an economy to enable the economy with which it is associated return to its normal growth level. NLMK DanSteel is found to be in dire requirement of enhancing its overall level of productivity for the sole purpose of generation of good reputation within the industry it is associated with. The government of Denmark is found to undertake initiative to tighten its financing and lending requirements prior to emergence of a situation of inflation within the economy structure.
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Agénor, P. R., & Montiel, P. J. (2015). Development of macroeconomics. USA: Princeton University Press.
Blanchard, M. O. J., Rogoff, M. K., & Rajan, R. (Eds.). (2016). Progress and confusion: the state of macroeconomic policy. US: US: International Monetary Fund.
Claessens, S. (2014). An overview of macroprudential policy tools (No. 14-214). US: International Monetary Fund.
Cordes, T., Kinda, M. T., Muthoora, M. P. S., & Weber, A. (2015). Expenditure rules: effective tools for sound fiscal policy? (No. 15-29). US: International Monetary Fund.
Bodea, C., & Higashijima, M. (2017). Central Bank Independence and Fiscal Policy: Can the Central Bank Restrain Deficit Spending?. British Journal of Political Science, 47(1), 47-70.
Chudik, A., Mohaddes, K., Pesaran, M. H., & Raissi, M. (2017). Is there a debt-threshold effect on output growth?. Review of Economics and Statistics, 99(1), 135-150.
Fernández-Villaverde, J., Guerrón-Quintana, P., Kuester, K., & Rubio-Ramírez, J. (2015). Fiscal volatility shocks and economic activity. American Economic Review, 105(11), 3352-84.
Lambert, C., Noth, F., & Schüwer, U. (2017). How do insured deposits affect bank risk? Evidence from the 2008 Emergency Economic Stabilization Act. Journal of Financial Intermediation, 29, 81-102.
Nyasha, S., & Odhiambo, N. M. (2018). Financial development and economic growth nexus: A revisionist approach. Economic Notes, 47(1), 223-229.
Panizza, U., & Presbitero, A. F. (2014). Public debt and economic growth: is there a causal effect?. Journal of Macroeconomics, 41, 21-41.
Sacchi, A., & Salotti, S. (2015). The impact of national fiscal rules on the stabilisation function of fiscal policy. European Journal of Political Economy, 37, 1-20.
Bloomberg.com (2017). Retrieved from https://www.bloomberg.com/profiles/companies/674246Z:DC-nlmk-dansteel-a/s [Retrieved on 09-12-2017
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